The Challenges for the Cypriot Economy for 2016

Assessing the current state of the Cypriot economy one could say that the year 2015 was undoubtedly another difficult year with several problems still remaining unresolved. One could also though add a positive note, that it was the year during which the economy finally returned to growth after several years of recession. The latest figures have shown that, as compared to the previous year 2014, growth for the third quarter of 2015 was at 2.2%, which is the highest rate of growth recorded since the fourth quarter of the year 2010. Also, the fiscal data show high primary surpluses. The forecasts for the period beyond 2015 are that there will be primary fiscal surpluses, with the target being 3% to 4% in the medium term, which is enough to place public debt on a path of sustainability. These results were helpful in the Credit Rating Agencies’ upgrading of the Cypriot economy ratings, and contributed to a successful exit to the international markets in late October with the issuance of a ten – year bond at an interest rate of 4.25%. Currently, we are at the last evaluation of the Cyprus economic adjustment programme by the Troika lenders and, unless something unexpected occurs, as of April 2016 Cyprus will be successfully getting out of the Memorandum of Understanding.

However, as mentioned in the beginning of this assessment, there are still many difficulties and challenges to be tackled. First, there is the huge problem of unemployment, especially among the young people. A large number of young Cypriots opt to follow the path of migration as there are no satisfactory new employment opportunities in the island. Furthermore, a large proportion of the economically active population remains unemployed for long periods of time. It could be said that, at the least, unemployment has been stabilized, but it still remains at very high levels, close to 16%. The government, but the private sector as well, must invest much more in development projects if unemployment is to be reduced to acceptable and affordable levels.

There is also the big problem with the alarming rate of increase of the non – performing loans (NPLs) in the system. The latest figures from the Central Bank of Cyprus (CBC) show that they now make up nearly 50% of the total of the domestic loan portfolio, a figure of around €27 billion. Therefore, the data show that there is a serious problem which banks must address and indeed they will have to find credible solutions. Of course the question is what these solutions would be and cited below are the proposed solutions to this grave problem of NPLs:

• Firstly, the enactment and adoption of the foreclosure legislation and of the insolvency bill framework will eventually force strategic defaulters to approach the banks and start cooperating.

• Secondly, the banks need to increase the speed and effectiveness in the process of restructuring the loans.

• Thirdly, the amount of non-performing loans will start to decline significantly when the real economy recovers and more jobs are created.

• Finally, the establishment of an asset management company similar to the National Asset Management Agency – NAMA of Ireland, or a “bad” bank, that would undertake all the problematic loans and take them out of the banking sector, thus allowing the banks to clean up their balance sheets, could be another radical solution to this problem.

Another significant challenge faced by the economy are the structural reforms included in the Memorandum of Understanding, among which are the privatisation of State Owned Organizations, the General System of Health Insurance (ΓΕΣΥ), and the reform of the Civil Service. Unfortunately, we are far behind as regards this part of our commitments and the much needed structural reforms are not being implemented. We had a golden opportunity to implement these changes through the Memorandum of Understanding, but this opportunity seems to have been lost. I am very much afraid that this may cost us dearly in the future.

The writer is an Associate Professor of Finance at Cyprus International Institute of Management (CIIM) and the Director of the MSc in Financial Services.

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